Choosing the Right ETF: 5 Key Factors to Consider

A Look at the Markets - Bitcoin

Bitcoin has been taking the lead in the markets since the US presidential election result. Newsletter readers will know that I was looking for a weekly close above 72,000 dollars as a positive signal. And so it proved with Bitcoin breaking 93,000 dollars before falling back to around 87,700 dollars as I send this newsletter (8 am Friday 14th November 2024). Note that with such volatility, the price could be anywhere by the time you read this. 😀

The chart depicts a bullish breakout from the areas of support and resistance (indicated in light orange) that we have been diligently monitoring for several months.

Where will the Bitcoin price go from here?

I believe the price action will exhibit bullish tendencies over time, but it won’t be a straight line. Be prepared for profit-taking, which will result in significant pullbacks. I wouldn’t even be surprised if the price retests 72,000 USD.

Time will reveal the true trajectory.

Choosing the Right ETF: 5 Key Factors to Consider

In last week’s newsletter, we explored different types of ETFs and how they can fit into your retirement portfolio. This week, I want to dive into some of the key factors you should consider when selecting an ETF. Making an informed choice can make a big difference in the long-term performance of your portfolio.

1. TER (Total Expense Ratio)
   As we discussed last week, the TER is the cost of holding the ETF. The lower the TER, the better. However, be aware that funds with exposure to more countries and emerging markets will typically have higher costs. It’s essential to find a balance between cost and diversification.

2. Reputation of the Provider
   You’ll likely hold your ETF for many years, so it’s crucial to choose a fund from a reputable provider. Companies like Vanguard, iShares, and Invesco have established themselves as leaders in the ETF space. A simple internet search will help you find reviews and insights on a provider’s track record.

3. AUM (Assets Under Management)
   The size of a fund matters. ETFs with large AUM are less likely to be discontinued and offer better liquidity, making buying and selling smoother. A larger fund size often means lower operational costs, benefiting long-term investors.

4. Distributing vs. Accumulating
   This refers to how dividends are handled. Distributing ETFs pay out dividends regularly, while accumulating ETFs reinvest those dividends, leading to faster growth.
   You might think the choice comes down to whether you want to grow your portfolio or receive regular income. However, tax implications can vary depending on your country’s laws. For example, one type of fund may offer tax advantages over the other. It’s worth consulting with a financial advisor to understand what’s best for you.
   By the way, if you prefer an accumulating fund but still want to generate income, you can sell a portion of the fund each year - just remember the 4% rule from a previous newsletter.

5. Tracking Error
   Tracking error measures how closely an ETF tracks its index. Ideally, you want an ETF with a low tracking error, ensuring it mirrors the index's performance. A useful resource for checking tracking errors is JustETF.

Conclusion

These five factors—TER, reputation, AUM, distributing vs. accumulating, and tracking error—are essential to making an informed ETF choice. I recommend carefully considering these points before investing, and if you’re unsure about the tax implications, always consult a financial advisor.

Next week, we’ll finally look at a newsletter reader’s question (I know I promised to do it this week but I wanted to cover everything my decision is based on first). We will use this opportunity to look at a practical example.

As always, this newsletter provides general guidance—please consult a qualified professional for personalised advice.

The Potential of Bitcoin and Blockchain - Can it Work for Italy?

Last week’s US election victory for Donald Trump had a positive impact on cryptocurrencies. One possible reason for this was the possibility of a Bitcoin strategic reserve.

What is a Bitcoin Strategic Reserve?

A Bitcoin strategic reserve means holding a large amount of Bitcoin as a national asset, similar to how governments have long stored gold. If a government builds up a Bitcoin reserve, it can use it as a hedge against inflation and currency devaluation, providing an alternative way to pay down national debt.

For example, the US government could use Bitcoin as a buffer against the dollar's devaluation, helping to stabilize the national economy and slowly reduce its debt. This idea isn't new - Norway has a sovereign wealth fund, the Kingdom of Bhutan already holds around $1 billion in Bitcoin, and companies like Tesla have adopted similar strategies. So if Bitcoin reserves work for Bhutan and Tesla, why not for other nations - like Italy?

Italy's Economic Challenges

Let's take a look at Italy, a country facing some major economic challenges, including:

1. High Debt: Italy's debt stands at around 175% of its GDP (compared to the US at 89%).

2. Low Growth: Economic growth in Italy has been stagnant for years, partly due to outdated systems and limited investment in new technology.

3. Heavy Bureaucracy: Italy's economy struggles with high levels of bureaucracy, which can slow down business operations and discourage innovation.

4. Trust Issues: There's often a lack of trust between customers and suppliers in Italy, with issues like slow payments and unreliable delivery impacting business relationships.

How Blockchain and Bitcoin Could Make a Difference

Could embracing Bitcoin and Blockchain solve some of these problems?

1. Reducing Debt with Bitcoin: Just as Bhutan uses its Bitcoin reserve as a long-term asset, Italy could diversify by holding Bitcoin as a hedge against its national debt. If Bitcoin values rise over time, Italy's reserve could grow in value, helping offset debt.

2. Boosting Economic Growth: Blockchain technology could attract new investments and foster a more dynamic economy. As companies and investors see Italy moving towards digital assets and decentralized finance, this could encourage international and domestic investment.

3. Streamlining Bureaucracy: Blockchain's transparency and efficiency could help simplify Italy's complex systems. Smart contracts could automate many government processes, reducing delays and making interactions with businesses smoother and more reliable.

4. Building Trust with Smart Contracts: Using blockchain-based smart contracts could create more dependable relationships between customers and suppliers. With smart contracts, payments and deliveries would be processed only if both parties meet the agreed conditions, helping to reduce disputes and delays. Customers would know that suppliers have to deliver and deliver on time. Suppliers would know that they would get paid and get paid on time.

The Time to Act Is Now

The world is moving forward, and Italy has a choice: embrace this technology and become part of the change, or stay on the sidelines and watch others take the lead. Investing in a Bitcoin reserve and adopting blockchain could transform Italy's economy, turning challenges into opportunities.

Do you think that your country should embrace Bitcoin and Blockchain technology? If not, why not?

Idiom of the Day: Stay/Sit on the Sidelines

We looked at some sports idioms and metaphors in our sister newsletter, Business Fluency. Here is another one.

Stay/Sit on the sidelines - idiom - if you stay on the sidelines, you are not an important part of what is happening.

Stay on the sidelines and sit on the sidelines have the same meaning.

The idiom comes from sports where the sidelines are outside the playing field or pitch.